# Basics of variance calculation-Understanding Period End activities, WIP and Variances

Hello friends,

This is my 6th document in costing and this one is intended to explain variance calculation and related activities at period end.I will walk you through the period end activities and variance calculation. In this document I have try to limit myself period end activities in relation with WIP & Variance calculation. See below screenshot it is a background job (SM36) scheduled to run period end activities. We calculate Actual Overhead (T-Code CO43), Work in Process (KKAO), Variance calculation (KKS1) and Settlement (CO88). Along with this I have also included CO summarization KKRC for various KKBC reports.

**Figure 6.1- Background Job of period end activities**

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Let’s understand each of the transactions and its usage in detail

**Overhead**

During a month actual primary cost such as wages, utility, are debited to cost center. Some of the costs may be included in planned activity rate and allocated to products from cost centers during activity confirmation. Overhead calculation offers most flexible way of allocating cost to different products during period end overhead calculation. When you run the transaction code CO43 (CO42 for individually) system will go to the cost sheet where the overhead key, calculation base and credit key define. In overhead key the rates are define plan as well as actual (to view cost sheet transaction code is KZS2) at the time of running the overhead system calculate the overhead amount and post the same to respective production order. Please refer my scan document on the same overhead cost in costing sheet http://scn.sap.com/docs/DOC-49880

**WIP-Work in Process**

Production costs associated with manufacturing orders are temporarily tracked on the profit and loss financial statement. Work in Process represents production cost of incomplete assemblies at period end. In order to balance sheet items accurately reflect company assets WIP costs are temporarily moved to WIP Balance and profit and loss account. There are two types in WIP process valuation

-WIP at **Target** valued based on Cost Estimate (Mainly used in Product Cost By period)

-WIP at **actual **valued based on actual debits to a manufacturing orders. (Mainly used in Product Cost by Order)

The advantage of WIP at target calculation is that variances and WIP can be posted at same time. If production orders remain open for multiple periods variances reconciliation is easier using WIP at target in **Product Cost By period**.

WIP is calculated each period until the status of an order status set to fully delivered or TECO, and then the entire WIP is cancelled and variance is calculated in **Product Cost BY order**.

**Variance Calculation**

As we know it helps us to provide the difference between 0rder debits and credits.

- Target cost are determined during variance calculation therefore few check points before we calculate Variances in
**Product Cost By period**. - There must be Goods receipt for FG for at least one of the manufacturing orders
- There must be variance key in the product cost collector
- Standard cost estimate should be valid the day of posting for product cost Collector
- The material origin indicator should be selected for all cost related components
- Variance configuration must be carried out (see below variance configuration)
- The product Cost Collector must have settlement type (PER)
- Variance calculation using (KKS1/KKS5)

To calculate variances in **Product Cost by Order** which the manufacturing order must meet the following conditions

- Settlement Type FUL (Full settlement type) in settlement rule
- Status DLV (delivered) or technical Complete (TECO)

**Note-You can use Settlement type PER ( Period ) in Product Cost By Order where companies does not wanted to calculate WIP and each order should be settled in the period. In that case you will have to manually set the order status to TECO in order to calculate variances. This is not a SAP standard practice but some companies do this.**

**Total variance**-This is the only variance which is relevant to settlements, the difference between debit and credits are settled to financial accounting, PCA and COPA. Target cost version 0 is used to calculate the total variance. Other variances like Production variances and Planning variances are for information purpose only.

**Settlement**

Settlement is the last step in period end closing for product cost collector and Production orders.

**Summarization**

I have added one more step to get those KKBC reports for different purpose you can configure the same in KKR0

Now let’s see some basic configuration required for variance calculation SAP

**Variance Configuration**

**Step-1 OKV1**

By checking scrap indicator the value of scrap is calculated during variance calculation and deducted from total variance.

**Step-2 OKVW**

When a material Master is created a default variance key is proposed for the costing 1

**Step-3 T-code OKVG**

If you don’t select a particular category, the variances of that category will be added to the category of remaining variances. An exception is the scrap variances. Scrap variances that are not shown as such can go into any other variance category on the input side selection in this screen as we already defined it in Variance Key.

**Step-4**

**Defining Valuation variant for Scrap and WIP (Only Product cost By Period) – Configure it in IMG node**

At period end Target cost are temporarily moved from Product cost collector to WIP Account. Variance is also calculated and posted at the same time.

**Note-In Product cost by Order this does not apply as WIP and Scrap is valuated at actual.**

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**Step-5-T-code OKV6**

Define Target Cost version

Target cost are based on current standard cost estimate which is actual credits and control cost which is actual cost is actual debits. Valuation variant is to control which cost estimate is used to valuate scrap. You can use different target versions for different variance like production variance and planning variances with other parameters.** **

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**This is a basic document for Variance calculation and various steps involved with it. This is intended for beginners who is starting to learn about Controlling. Please refer my previous documents posted in SCN for fair idea about costing Basic of costing.**

Basics of SAP Standard Cost estimate- Understanding the flow of cost settings-Part 1

Basics of SAP Standard Cost estimate- understanding costing variant-Part 2

Basics of Standard Costing – Understanding the Cost Component Structure-Part 3

Basics of Standard Costing – Understanding overhead cost flow-Part 4

Basics of Costing – Understanding Actual Cost

Let me know the feedback .I will try to come up with Cost center variance reporting and Scrap variances in my future document which will complete the series of Variance calculation in SAP.

Thanks

Hrusikesh Dalai

Hi Hrushi

Great document brother. The best part is its simplicity. I mean if one has a little idea of the process flow, he/she can easily follow the document.

Keep it up. Anxiously waiting for document on cost center variance.

Regards

Rajneesh Saxena

Rajneesh,

As always thanks for the motivational words, Appreciate for reading the document and rating it. The first comment is always important.

Thanks

Hrusikesh

Well done Hrushi..

Nice document explaining the concept of Variance calculation

Br. Ajay M

Ajay,

Your comments are always special, I am glad you read it and liked it i have tried to keep it simple. Its always pleasure to receive these motivational words from you.

Thanks

Hrusikesh

Hi,

Nice to see the doc,U have selected heart of the industry subject,most guys looking for.

Appreciates to continue on the subject with series on the Document,

Thanks for the sharing,

Always well come series,

Best Regards,

Devendra

Devendra,

Your 5 star always motivates me. Thanks for reading and rating it. I am glad you liked it.

Thanks

Hrusikesh

Hi Hrushi,

You have covered the entire part of Variance calcuaton which may not be understand in a single thread.

Simplifying the job with continuous blogs.

All the best!!

BR, Srinivas Salpala

Srini,

Yeh i tried to keep it simple as it kind of reassure the reader the topic is easy to follow. I have learned this from Ajay and few other writers. I am glad you read, liked and commented on it. It is important to receive feedback from you guys.

Thanks

Hrusikesh

Hi Hrushi,

Thanks for sharing the document, I went through all the different parts posted by you.

It has provided a great insight to the specific areas of costing.

Regards,

Sunil

Hi Hrushi,

Thank you for sharing nice document.

could you clarify on below statement...

" An exception is the scrap variances. Scrap variances that are not shown as such can go into any other variance category on the input side selection in this screen as we already defined it in Variance Key"

Is it if we not select the scrap varince at key level it will not appear and distributes amoung Input price,Input qty and remaining input varince...could you correct my understanding.

Regards,

Sekhar

Hi Sekhar,

Your understanding is correct

1-

Checking Scrap Indicator at Key Level See my Step 1- T-code OKV1the value of Scrap is calculated and subtracted from total variances. Once you selected this irrespective of what you select in Variance variant scrap is calculated and subtracted from total variance.2-

Checking Scrap Indicator at Variance variant see my step 3- T-code OKVGVariance variant determines which variance category is calculated when i say exception that mean even if you do not check scrap variance here scrap variance is calculated based on previous settings in this case in this scrap will not display separately in target cost version. If you select the indicator here the scrap will be displayed separately in target cost version. So in this step you control either scrap variance should be displayed by selecting scrap variance indicator.

Target version 3- scrap not selected so we don't see scrap separately as it enters all other variances in Input side.

Target version 0- Once selected it is displayed separately.

I hope i am able to answer your question

Thanks

Hrusikesh

Hi Hrushi,

Thank you for detailed explanation.

Regards,

Sekhar

Sunil,

Thank You for reading it. I am glad it helped you

Regards

Hrusikesh

This s Incredible! Simple to follow as your earlier documents the best part is after going though your documents it looks so simple that even newbie like me feel its so easy.

It requires a lot of detail to explain it in simple language well done

thanks for the series and as always a valuable document thank you for creating and sharing these documents.

Regards

Prasad.

Prasad,

Thank you for reading my documents and commenting on it. Your motivational words are so encouraging that helps me to keep writing these documents.

Regards

Hrusikesh

Very good document...thanks for sharing the valuable knowledge...

Mariks,

Thanks for the ratings appreciate it.

Hi Hrusikesh,

Excellent document. Given in simple words makes reading easy for anyone. Keep contributing please.

Thank You Ganesh

Dear Hrusikesh

Pls. give us feedback to solve some issue.

1) in our company standard price is changing/update yearly basis. We want this monthly.

2) in COGM mainly direct cost is involve. Is there any way - user can get the total cost of making the goods (including direct and indirect). Now in our company user are calculating costing manually. How can they get benefit from SAP.

Regards

Tarek

Tarek,

There is several ways to this.

Answer to question 1 is yes.

And to question 2 is there are various ways to calculate and include different costs in standard cost in SAP and SAP is capable of include all type of costs in Standard cost.. I would suggest you post the question to the forum defining your situation to get better answer. Also I would suggest you to read my documents Basics of SAP Standard Cost estimate- Understanding the flow of cost settings-Part 1

and respective series to understand how it works.

Thanks

Hrusikesh

Dear Hrusikesh,

Good Document with clear explanation. Keep doing.

Thanks Aakarsh for reading it, i appreciate your comment here.

Your 3rd excellent document I have read, very useful and clear.

thanks for sharing, keep posting.

Thanks Eric

Hrushikesh,

Very useful document,

Regards,

Satya

Thank you Satya

Hrusikesh --- Awesome Work man , Great job on this !!

Thanks

Aryan

Excellent Document ! Got a clear conceptual vision on WIP & Variance Calculation. ðŸ™‚

Thank you for sharing the knowledge!!

Regards,

Reshma

nice document

Really nice document

Very nice sir ...

Thanks 4 Share!

Dear Hrushikesh, I would like to say my since THANKS for this wonderful documentation with very helpful explanation on variance calculation. We look forward to your further blogs. Thank you once again.

could you please explain the use of settlement. Why a order need to be settled